Cal-Maine Foods Q2 hit hard by challenging markets

Second-quarter 2017 net income falls $23 million from last year.

Cal-Maine Foods Inc. recently reported results for its fiscal 2017 second quarter and 26 weeks ended Nov. 26, 2016.

Net sales for the second quarter of fiscal 2017 were $253.5 million, a 53.6% decrease from $546.0 million in the second quarter of fiscal 2016. The company reported a net loss of $23.0 million, or 48 cents per basic and diluted share, for the second quarter of fiscal 2017, compared to net income of $109.2 million, or $2.27 per basic share and $2.26 per diluted share, for the second quarter of fiscal 2016.

For the fiscal 2017 first half, net sales were $493.4 million, compared to $1.1559 billion for the prior-year period. The company reported a net loss of $53.9 million, or $1.12 per basic and diluted share, for the first half, compared to net income of $252.3 million, or $5.24 per basic share and $5.22 per diluted share, for the year-earlier period.

“Our results for the second quarter of fiscal 2017 reflect extremely challenging market fundamentals in the egg industry,” said Dolph Baker, chairman, president and chief executive officer of Cal-Maine. He said after the laying hen losses due to the 2015 avian influenza outbreak, U.S. Department of Agriculture numbers show that the egg industry has repopulated farms, and laying hen numbers are nearing pre-outbreak levels. "However, market demand trends have not kept pace with the higher production levels. While retail customer demand has been steady, egg export demand has not fully recovered following the aftermath of the (influenza) outbreak,” Baker noted.

Baker added that the company also experienced reduced demand for egg products, as many commercial customers reformulated their products to use fewer eggs when prices spiked and have been slow to resume previous egg usage levels.

“Together, these factors have created an oversupply of eggs, and prices have fallen dramatically from the record-high levels last year. For the second quarter of fiscal 2017, our average customer selling prices were down 50.7% from the same period of fiscal 2016,” he said.

While the egg market has been in oversupply, Baker said recent USDA reports show that the chick hatch has been down for three consecutive months from prior-year levels. As such, Cal-Maine expects to see a moderation in the size of the laying hen flock. Egg prices have also risen sharply since the end of the second quarter.

Specialty eggs, excluding co-pack sales, accounted for 22.4% of the company’s total sales volume for the second quarter of fiscal 2017 — the same level as the prior-year period. Specialty egg revenue was 45.8% of total revenues, compared with 26.1% for the second quarter of fiscal 2016.

“Specialty egg prices have typically been less volatile than conventional eggs, which proved to be the case in the second quarter, as the average selling price for specialty eggs was down 13.2% over the second quarter of last year, while the average selling price for non-specialty eggs was down 64.9% over the prior-year period,” Baker said.

He added that the company has been focused on expanding its specialty egg business, especially cage-free eggs.

“We have made significant investments across our operations to meet anticipated demand, as foodservice providers, national restaurant chains and major retailers, including our largest customers, have stated objectives to exclusively offer cage-free eggs by future specified dates. While we expect this multiyear conversion will be a disruption for our industry, we believe it provides an opportunity for Cal-Maine Foods, and we are working closely with our customers to achieve a smooth transition.”

Cal-Maine’s latest joint venture to produce cage-free eggs with Rose Acre Farms in Texas is on schedule to reach full expected capacity in early 2017.

“In spite of challenging market conditions, we continued to manage our operations in an efficient and responsible manner," Baker said. "Our feed costs per dozen were down 7.7% compared with a year ago. Our overall farm production costs were slightly lower than the second quarter of fiscal 2016, even with higher capital expenditures for conversion and other improvement projects.”

During the second quarter, the company completed the acquisition of the assets of Foodonics International Inc. and its entities doing business as Dixie Egg Co. related to commercial production, processing, distribution and sales of the shell egg business.

“The additional production capacity and the inclusion of the Egg-Land’s Best Inc. franchise with licensing rights for portions of certain markets in Alabama, Florida and Georgia, as well as Puerto Rico, Bahamas and Cuba, further advances our strategy to grow our business through selective acquisitions. We have a strong balance sheet, and we continue to look for opportunities to make additional acquisitions that meet our criteria. As always, we are focused on delivering greater value to our shareholders in fiscal 2017,” Baker said.

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